The Law Reform Commission has published a discussion paper on the foreclosure regime in the Cayman Islands, concluding that existing laws should be updated. In publishing the report, the commission is inviting comments from stakeholders and the general public on the issue.
Foreclosures have been a hotly debated topic in Cayman since the financial crisis brought about a significantly higher number of mortgage defaults and subsequent property repossessions than usual.
“The dominant theme of the public commentary has been the level of hardship, it is claimed, that has been experienced by the owners of residential property, who have been affected by these procedures,” the Law Reform Commission said.
Official statistics produced by the Cayman Islands Monetary Authority show a significant and steady decrease in recent years from 27 completed residential foreclosures in the second quarter of 2016 to nine in the first quarter of 2018. At the same time, the value of these repossessions dropped from 2.82 percent of the total value of residential mortgages to 2.0 percent.
However, when considering whether current law strikes the best balance between the interests of lenders and borrowers, the commission concluded that the rules for enforcing security over land and real estate should be reformed.
A detailed discussion of Cayman’s legal system is complicated by the fact that foreclosures, if properly defined as taking over the title to a property and becoming the registered owner, do not exist under Cayman law, even though the term is widely used colloquially. In practice, this means, for instance, that the lender has no right to take possession of a mortgaged property before it is sold.
Instead, the rights of a lender are protected under the Registered Land Law by creating a charge over a mortgaged property. In the event of a default, the lender has the right to force the sale of the property.
The charge instrument, which serves as security, must include an acknowledgement signed by the borrower, confirming that the borrower understands the remedies available to the lender if the debt is not repaid or other obligations under the loan agreement are not complied with.
However, the Law Reform Commission notes that it is not clear if borrowers are fully aware of the measures that lenders can take in such circumstances under section 72 of the Registered Land Law.
“It would not be surprising to discover that even where the charge instrument contains the acknowledgement, there are very few cases in which there is, at the closing of a property sale, any reference whatsoever to section 72, or any of its terms,” the report states. “The purchase of a residential property very often marks a significant milestone for the purchaser, accompanied by the usual euphoria and excitement of the accomplishment. Hardly anyone would typically wish to dampen the mood by a detailed reference to the potential consequences to the purchaser in the event of a default.”
If this were the case, the commission said, the law would have failed in achieving its objective of providing a safeguard for borrowers to understand all the risks before they enter into a loan agreement.
Another issue highlighted by the report relates to the lack of guidance on the information that should be provided by a lender in an enforcement notice, for example, on the steps that a borrower should take to remedy a default.
The commission said, “It is not difficult to defeat the apparent intended purpose of the section 72 notice, which is, to allow the borrower an opportunity to remedy an outstanding breach.”
While the law generally strikes a balance between the rights of lenders and borrowers, the commission said it would be naïve to assume that both have the same bargaining power. Most legal systems leave it to the borrowers to enforce their rights by taking the lender to court, the report notes, even though “borrowers faced with an enforcement sale of their residence will hardly have the financial means to enforce their legal rights.”
The commission therefore asks if there should be mechanisms that allow for the protection of borrower rights without having to incur the expense of court proceedings.
Much of the discussed areas of reform in the discussion paper concern the way a forced sale is executed. Although the law intended for the lender to be able to carry out an enforced sale without the intervention of the court, applications for pre-approval clogged up the Grand Court until the court issued a series of practice directions and the Grand Court rules were changed.
The commission said, “The initiatives taken by the Grand Court, applying the developing case law, only became necessary because the provisions of the [Registered Land Law] which prescribe a lender’s power of sale are insufficiently clear and in need of reform.”
Although the number of pre-approval applications to the court have declined considerably, the costs of forced sales remain high.
Borrowers who are subject to an enforced sale of their property often complain about the significant costs that are deducted from the sale proceeds. These costs can mean that despite the sale of the property, the borrower remains indebted to the lender, often leading to further legal action.
Any reform would have to balance rights and interests of both parties, given that there are valid reasons why the lender should not bear the costs of the borrower’s default, the discussion paper said.
“One possible solution might be to reintroduce the right of foreclosure as a remedy available to lenders as a means of the lender having the ability to take title to the property, but with the consequence that upon foreclosure, all outstanding liabilities due to the lender under the secured facility are eliminated.”
Another source of conflict between lenders and borrowers is whether a lender “acted in good faith” and took all reasonable precautions to obtain the best price in an enforced sale. The courts will approach such a dispute by considering the steps taken by the lender to market the property rather than focus on the achieved price.
This is because the courts believe the market value of a property is best evidenced by the market reaction to the property on sale and not the value assigned by a professional appraiser.
The report found various marketing processes adopted by different lenders and noted that some practices appear to fall outside of established standards.
“For example, a sale which is defined in terms such as ‘Bank Sale’, or ‘Foreclosure’, would seem not to be consistent with the standard that the lender must behave as a reasonable man would behave in the sale of his own property,” the discussion paper said. “Reasonable persons would not signal to the world that the sale of the property is taking place in distressed circumstances.”
A sale by a lender to itself or a related party, such as an employee, although permitted under the law, “would no doubt attract a very high degree of suspicion,” the paper added.
The broad questions that need to be addressed in reforming the law are whether any changes should be made by amending the Registered Land Law, whether there should be specific new legislation dealing with the enforcement of mortgage security over residential property or whether these provisions should be included in a broader consumer protection legislation. In addition, the report asks if new legislation should incorporate the principles established by EU directives relating to residential property in Europe.